Keynes and long term accountability

by Jörgen Eriksson on August 31, 2011

During the summer 2011 we have witnessed a dramatic increase in European and American national deficit crises.

It is a macro economic crisis, with national governments unable to manage national debts. Governments have been allowed to fund themselves through borrowing since the 1930s, when John Maynard Keynes proposed that inadequate aggregate demand could lead to prolonged periods of high unemployment.  National governments should borrow and spend on public works in recessions to keep up demand, and thus smooth the transition to the next boom period when the national government budget should run a surplus.

The problem with the theory is that it justifies the decision by many politicians to run an almost permanent deficit. Political parties with the ambition to be re-elected are hesitant to recover the debt by running a surplus. Step by step small and big national decisions have been taken whereby irresponsible overconsumption has continued in too many countries.

The crisis became acute in 2008, as the credit crunch crisis shook the world financial systems, at the same time as it shrunk many economies due to lower economic output. Governments had to spend to save the financial industry and other large corporations, at the same time as their tax revenues were reduced by the crises.

In the wake of all these events we have noted the national and super national stakeholders were taken by “surprise”, as if the results from gradual increases in national debts would not have been inevitable. The long run effect of budget deficits are certain, just as it is for an individual or a company who takes on too much debt, however it is a truth that is conveniently seldom spoken about and pushed on to future decision makers. Politicians have let the ship continue sinking for too long without implementing the necessary countermeasures.

In the Eurozone complexity is added to the situation through the management of 17 different budgets that are often divergent. Some countries have stronger growth and low inflation and others weak growth and high inflation. Macroeconomic issues need to be dealt with in a unified manner without access to the traditional tool of currency devaluation in times of fiscal unbalance, resulting in a very difficult macro-economic environment to manage.

Some politicians in European countries call for centralizing more fiscal policymaking in Brussels under a European Minister of Finance. We believe a sustainable path to recovery is to be found in more local initiatives.  Instead of the current overconfidence in centralization, politicians should go for decentralization and encourage places and regions in Europe to develop their local attraction forces and rebuild European wealth from the local places.

Europe needs to recover and grow from its roots, from the local entrepreneurs, places and regions where entrepreneurial individuals and businesses can find the right climate. It is the task for the numerous European place managers and entrepreneurs to make this happen.

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